Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: Another economic blow for UK plc. Markets buy. Kuroda follows in the footsteps of Draghi. Chinese shares tumble on government action, will US shares fall on US inaction?
Another economic blow for UK plc
It seemed as if things were improving. It was only a slight improvement to be sure, but the surveys suggested the UK would expand in the first quarter of this year, meaning another recession will be avoided. Other data showed that the UK onshore economy (that is stripping out the effect of North Sea oil) did not contract in late 2011/2012. What with the suspicion that the ONS will in eventually revise data from 2012 showing expansion where it currently has contraction, some were saying that not only will the UK avoid a triple dip, but, in fact, it probably didn’t have a double dip recession.
Then on Friday, the latest Purchasing Managers’ (PMIs) Index for UK manufacturing was out, and it was bad.
The index fell from 50.8 in January, to 47.9 in February. Not only was that the lowest reading since October, it was way below the 50 no change mark. The manufacturing PMIs out for January and February suggest manufacturing contracted by 0.5 per cent so far this quarter.
Drill down, and the data looks even worse. The sub-index measuring new orders, a good forward indicator, fell from 49.7 to 46.6, and the sub-index for employment dropped from 49.8 to 47.1, a 40 month low. New export orders declined for the 14th month in succession.
Chris Williamson, Chief Economist at survey compilers Markit, said: “The return to contraction of the manufacturing sector is a big surprise and represents a major set-back to hopes that the UK economy can return to growth in the first quarter and may avoid a triple-dip recession.”
So is it possible to have a positive take on this news? Well, today will see the PMI for construction, and tomorrow for services. If they show an improving month for their respective sectors, this will help to alleviate the bad news in Friday’s report.
Markit reckons March’s survey will be a bit better. Let’s hope it is right. It is difficult to see any other reason for the bulls to smile.
The markets seem unperturbed by Friday’s disappointing news on UK manufacturing. The FTSE 100 is now in territory which means that it sets a new five year high every time it rises. At close of play on Friday it finished just 342 points shy of a millennium high and 551 off an all-time high. The news on the economy may be pretty awful, but the FTSE, which offers exposure to markets across the world, seems immune.
But while you can explain the rise in the FTSE by referring to exposure to emerging markets, it is harder to explain bonds and sterling.
On the news of Friday’s PMIs, the pound fell, but lifted again, so much that at the time of writing it stands at 1.551. This is slow by recent standards, but it was lower just before the UK saw its credit rating downgraded.
As for the yield on UK ten year bonds, this is now 1.8699, the lowest level since January 1. Markets just don’t seem bothered by all the gloom.
Kuroda follows in the footsteps of Draghi
Do you remember when Mario Draghi said: “We will do whatever it takes?” When the president of the European Central Bank said those words, the markets loved it. In fact Mr Draghi said: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
Funnily enough, the ECB has done very little since then, but the markets were so taken by Mr Draghi, so influenced by those words, that they seemed unaware of the nothing. They call it the Maradona theory of monetary policy, after the Argentinean footballer play dribbled the ball past half the England football team in that infamous world cup of 1982, by running in a straight line. The England defence – or so goes the argument – were swayed by expectation, and even though Diego ran in a straight line, the players whose job it was to tackle him, rather fell away.
So Mario does very little, the monetary policy equivalent of running in a straight line, but so taken are the markets with expectations of Mr Draghi that they buy Spanish, and Greek and Portuguese and even Italian bonds.
In Japan, Haruhiko Kuroda, the governor in waiting for the country’s central bank, was speaking at his confirmation hearing. In other words he was speaking at an important event. He said the central bank: “must clearly send out the message… that it will do whatever it can to beat deflation.”
The markets loved it too. “At last, Japan has learnt,” they say.
Maybe it has, maybe ‘whatever it can’ is enough, and maybe, while on the subject of cans, it won’t merely kick one down the road.
In fact, it is almost certain that Mr Kuroda will get his wish, because increases in Japan’s consumption taxes make rises in prices inevitable.
But a rise in Japan’s equivalent of VAT may push up prices, but will not lead to sustained inflation.
Capital Economics commented on the matter saying: “What Japan really needs is demand-pull inflation, not cost-push. The large amount of spare capacity in the economy suggests that underlying inflation is unlikely to reach 2 per cent on a sustained basis for many more years.”
That comment is precisely right. Japan, just like the UK, needs wages to rise faster than inflation. There is little, or perhaps no, evidence that QE, or indeed central bankers can achieve this.
Chinese shares tumble on government action, will US shares fall on US inaction?
In China, the government called for action to prick a property bubble. In the US Congressman, seemed determined to do as much damage to the US economy as possible.
In China it was just words. China’s cabinet called for more measures to enforce higher down-payments and interest rate payments on second properties, and stricter enforcement of taxes on gains on property prices.
China’s government wants to see the bubble in house prices deflate gently.
The markets did not like that idea, not at all, and – at the time of writing – the Shanghai Composite Index is down 4.61 per cent.
When you think about it, it is odd. A house price bubble was formed in the West, and when it burst, the result was the worst financial crisis in generations. If Alan Greenspan had, as it were, leant against the wind, and taken efforts to stop the US property bubble from forming, maybe right now the US economy would be in much better shape. But how do markets react when China does the one thing many think US central bankers should have done ten years ago? Why, they panic?
Meanwhile, don’t you think the reaction to the latest shenanigans coming out of the US Congress could be best described as tired?
So, Republicans and Democrats do the unthinkable, and don’t reach a compromise, so the unthinkable happens, government cuts are set to be enforced on a scale that people barely dare think about, and our old friend Mr Cliff – that’s fiscal Cliff – starts thinking nasty thoughts.
No doubt, it will turn out okay, there is more time than we realised to reach a compromise, and a compromise will be reached, until the next time that is.
Meanwhile across the media, the normal spate of articles proclaiming woe was surprisingly absent.
The reality is that, on March 1 certain pretty drastic cuts in government spending started to come into force because Republicans and Democrats were unable to agree on… well they were just unable to agree.
This is potentially disastrous for the US economy, but media coverage has been limited. Maybe they don’t want to think about it.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees